Can Pakistan afford the US led secondary sanctions for Russian oil?

Can Pakistan afford secondary restrictions against Russian oil imposed by the US?

With the prolonging of Ukraine war, the US and its western allies are tightening their sanctions further against Russia. Until now, Russian oil was not under any sanctions, both pipeline and the seaborn and Europe was buying Russian oil openly while other types of sanctioned were fully enforced.

Few of the EU countries even accepted Russian demand to make their payments in Russian Rubles! Since the beginning of Ukraine invasion, Europe has been under pressure by the US to find Russian oil substitute ASAP. Since then, Europe has been desperately looking to find other supply options at any price. Now, it seems that Europe has lined up new sources for its energy needs. Because of this reason, US and its allies have decided to put additional sanctions on Russian energy trade to cripple its economy further.

The new set of sanctions led by the US and its allies will begin on December 5, 2022. This time the main focus is to set a maximum target price (instead of floating oil price tied with the market prices) that any buyer can use to pay Russia for its oil for seaborn exports.

To enforce the price cap and to maintain entire transaction transparent, all the necessary maritime trade documents must be ready for inspection prior to loading of the vessel (oil tanker). In the event of any discrepancy related to the price cap, maritime services for sailing of the cargo like brokering, chartering, financing, insurance, navigation, etc. will be denied by the service providers. Keeping in mind that majority of these services are located in Europe with the local ownerships. If any service provider will be found in violation of the price cap limit, that company will be exposed to the secondary sanctions and severely punished in addition to imposing hefty fines and revoking of their business licenses.

According to some insiders of the discussion, the price cap will be between $63-64 per barrel. Under this price cap, while the current market prices are between 85-94/ barrel, Russia will be losing substantial amount of its revenues! Before the invasion of Ukraine, Russian oil production was about 10.9 million barrels per day while its oil export was 8.2 million barrels per day. This means that Russia was exporting majority of its oil production and by some estimates, by using the price cap, it will start losing ~$160M-$240M per day!

According to the sources, this cap has been derived from the historical price average and is above the Russian oil production costs. Russia has already denounced the price cap for its oil and has declared to stop selling oil to countries and companies that enforce the price cap.

The most commonly export/important documents for the maritime trade are:

= Certificate of the Vessel (ownership & its maintenance record)
= Bill of Lading
= Commercial Invoice (showing the price/total cost)
= Packing List
= Certificate of Origin (Country of Origin of the Cargo)
= Letter of Credit
= Export/Import Customs Declaration

With this backdrop of the Russian oil price cap and enforcement mechanism of the secondary economic sanctions on the violators, there is no room left for any country or company to even dare to go around the US led drawn redline for doing any oil purchasing from Russia, except at the price cap level. Since it is mostly directed to the seaborn trade, there is no way that any country, including Pakistan, can buy oil at higher prices than the price cap.

The current major buyers of Russian oil, namely China and India will be happy to buy at the cap price than the discounted prices they have been buying that have been higher than the presumed price cap of $63-$64 per barrel.

According to the industry sources, currently Russian oil is offered with $20-$25 per barrel discount against the market prices. This means that the current discounted prices are about $20-$30 per barrel higher than the cap price! To enforce the price cap, the US and its allies will monitor every transaction very closely as it will be completely transparent at the time of sales agreement, followed by at the time of loading of the vessel and finally at the time of its sailing from the port. In maritime trade, without all the needed documents, no vessel can leave the port to enter into the international waters.

In addition to the secondary sanctions, the US and its western allies have other weapons at their disposals through the SWIFT, bi- and multilateral donors (IMF, WB, ADB, FATF, Paris Club, etc.) to punish the violators of the sanctions.

These tools have been proven to be very effective in bringing the misery to the countries as we are seeing their full impact currently on Russia. Even if any country, including Pakistan, will bring its own vessel or charter it from a third party for loading the oil at any Russian ports, but if the commercial invoice and the customs export documents will show any higher price than the established cap price, insurance carrier will cancel the policy immediately and the vessel will not be able to leave the port.

In conclusion, under the current sanctions’ environment against Russia, the finance minister, Ishaq Dar, and Pakistan’s leadership have clear choices and hopefully will follow the option that is in the best interests of Pakistan without exposing the country to the US led secondary sanctions.